If you’re hurting financially, getting advice from a bankruptcy attorney before you sell your home could save you lots of money.
1. Get rid of judgment liens, instead of pay them.
If you have been sued by a creditor, or by anybody, and you didn’t resolve and pay the obligation, most likely a judgment was entered against you.. You might not even realize or remember if this has happened to you. It may have been many years ago, potentially even before you bought your home.
Even if you did deal with it at the time and settle the matter, and are making payments under an agreement with the creditor, most likely a judgment was still entered against you in case you didn’t end up paying as agreed.
Either way, the judgment is very likely a lien against your home. That lien amount is often substantially more than the amount you thought you owed the creditor, because of extra costs that the creditor stacks onto the basic debt—for court filing fees, attorney fees, late charges, and continuously accruing interest.
Even if you haven’t been sued by a creditor, if you are behind on payments a creditor may sue you in the near future. That creditor could get a judgment against you and place a lien on your home’s title before the closing of your intended home sale.
In all these situations, the judgment lien generally has to be paid in full before the house sale can close. If, as usual, the judgment is paid out of the proceeds of the sale, this reduces the amount you receive. Or the lien could reduce the amount of money available to go to more important debts, such as taxes, child or spousal support.
If there are not enough sale proceeds to pay the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. To the extent that you don’t pay it in full, you would likely continue owing the balance. Finally, if you don’t have enough to pay off the judgment creditor and it won’t settle under reasonable terms, that could kill your sale.
In contrast, either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” can often “avoid”—permanently get rid of—that judgment lien and “discharge”—legally write off—the debt that resulted in the judgment. That would allow you to sell the home without paying anything on that debt.
2. “Strip” a second mortgage.
Chapter 13 (but not Chapter 7) can often allow you to “strip” your second (or third) mortgage from the title of your home, resulting in you paying little or even nothing on that mortgage. This can save you tens of thousands of dollars, or even hundreds of thousands of dollars, especially when considering the interest savings over the length of time that you would own your home.
Chapter 13 is able to do this by changing the debt secured by the mortgage to an unsecured one, and then lumping that debt in with all your other unsecured creditors, and paying them only as much as you are able to over a 3-to-5-year period. This only works if your home is worth no more than the balance on the FIRST mortgage (plus the balance on any property taxes or other “senior” liens). In this situation, the law effectively acknowledges that all of your home’s value is eaten up by liens that are legally superior to the second mortgage, leaving no equity at all for that second mortgage, making it an unsecured debt.
At the end of your Chapter 13 case, having paid what your budget says you can afford to all of your unsecured debts, including the debt formerly secured by the second mortgage, the remaining balances on all of your unsecured debts, including the second mortgage one, would be permanently written off. You end up with your home completely free and clear of that mortgage, and much less underwater.
3. Buy time for better offers.
Filing bankruptcy can buy more time for you to sell your house. It can buy a little extra time or even potentially a couple more years to sell.
A home sold under time pressure will almost never get you a good price. You will much more likely receive the maximum sale price after buyers have had plenty of time to view the property and make offers.
If you feel under immediate time pressure to sell because of a threatened or pending foreclosure, or because of other creditor problems, Chapter 7 can usually buy at least an extra few weeks, often an extra few months, and sometimes even longer, depending on the aggressiveness of your mortgage holder.
A Chapter 13 case could buy you many months or even a few years, depending on the circumstances. This may be very important for family and personal reasons. Also, considering that in many real estate markets the property values are steadily increasing, the additional time may even allow you to regain some of the property value lost in the “Great Recession.”
These advantages in selling your home—advantages in money and timing—are only possible if you meet with a competent debtor-creditor attorney and formulate an appropriate strategy, BEFORE you decide to sell the home.
The next blog will give you more ways that bankruptcy can give you huge advantages with your home. These can completely change whether or not you should sell your home, if you sell when you should sell, and who would get paid from the sale proceeds.